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In December 2009, the city of San Diego issued audited financial statements on time.
By completing what’s normally a standard annual occurrence for cities, San Diego appeared to be leaving six years of credit freezes, inexplicable delays and national embarrassment in the past.
The next financial statements, though, never came on time, and that lapse now has stretched to seven months.
“We finally got over that hump and got current and then we immediately got delayed again,” said Jeff Kawar, who monitors the annual financial statements for the city’s Independent Budget Analyst.
Like problems in the past, the delay has cost the city time and money, though on a much smaller scale. Unlike the past, no regulators are arguing the problem is more than a one-time glitch. City officials believe the setback will end soon. Its outside auditors have received draft financial statements and expect to release their opinion by the end of August.
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After a panoply of fiscal warning signs more than six years ago, credit rating agencies hauled San Diego off the public bond market. It was one of the many ignominies the city faced because of a systemic inability to produce accurate financial information and other legal and political ills.
This time San Diego’s problem is with the new computer system it installed to help it produce accurate financial information. Finance officials have toiled since last November to fix the problems with little outcry. Rating agencies haven’t shown the same concerns as the past.
“I think they’re two very different scenarios,” said Alan Gibson, a director for Fitch Ratings.
Still, the delay hasn’t been without its costs. The city pulled a planned public refinancing of existing bonds last November because of problems with the financial statements, a deal that was expected to save $3.3 million in interest payments over 10 years.
Just last month, the city paid between $200,000 and $325,000 more in interest to sell short-term cash flow bonds on the private market. The additional short-term bond costs would be more than enough to pay for the city’s fire pit program, which needs private assistance to survive.
The problems also add tarnish to one of Mayor Jerry Sanders’ most significant financial achievements. His office issued six years of backlogged financial statements in 24 months, which helped restore the city’s credit rating and its access to the public bond market.
The trust credit agencies and the markets have in the Sanders administration has helped the city avoid major pain, said Jay Goldstone, the city’s chief operating officer. The agencies understand that computer problems happen and the city has kept the agencies informed of its progress, he said.
“Not only is it factually correct, but it’s a plausible explanation,” Goldstone said. “Whenever you go through such a significant conversion of a financial system, there are unforeseen issues that arise.”
The city’s suspension from the public bond market in 2004 was one of the major embarrassments leading to then-Mayor Dick Murphy’s resignation. The city’s outside auditors refused to sign off on the city’s books from 2003 forward even after expensive external investigations. The city no longer could sell bonds on the public market, losing out on the cheaper interest rates governments can pay to finance their projects. For San Diego, improvements to crumbling roads and repairs to water and sewer systems were delayed.
To much fanfare, Standard & Poor’s, another rating agency, restored the city’s credit in 2008. The following year, the city went on a bond bonanza. It issued $1.7 billion in public debt, primarily to refinance more costly private bonds. The city refinanced more bonds the following year.
But the financial statements’ delay brought it all to a halt. The city hasn’t issued public bonds in a year. Goldstone said the Mayor’s Office thought better of it.
“It’s unfortunate that San Diego had its history,” he said. “We could have even gone out to the bond market without our financials. We chose not to because of San Diego.”
The computer problems stem from employees not charging their time to the correct city accounts for the projects they were working on, Goldstone said. Finance officials had to correct “probably tens of thousands of lines of data,” he said.
Implementation of the computer system was mostly smooth, Goldstone said, but this problem took significant time to fix. The new computer system, recommended as part of a $20 million external audit, has had problems of its own. It was overbudget, delayed and a graveyard for high-level city officials.
The city had hoped to issue its financial statements by the end of June. A city official called the financial statements “tremendously delayed” at a City Council Audit Committee meeting Monday morning.
At the committee meeting, the city’s outside auditors, Macias Gini & O’Connell, said they haven’t identified any red flags in the draft they’ve received.
They also told the committee they’re working on the city’s 2011 financial statements, too. They’re expected to be released on time at the end of the year.
Goldstone said he hopes the mayor will have delivered two on-time audits by the time he leaves office at the end of 2012.